1H20 revenue was -9.1% year on year, and Guimu's net profit was -5.3% year on year. The epidemic affected the volume and price performance of 1H20 cement. The epidemic combined with delays in the commencement of major projects led to poor performance in the core profit area of Shaannan. The performance fell slightly short of expectations. The decline in coal prices led to an improvement in tonnage costs, but the reduction in cost was less than the price drop, and gross profit per ton declined somewhat.
Expense control was good overall, financial expenses achieved net income, and operating cash flow declined year-on-year. After the rain disturbance is over, it is expected that prices will recover relatively quickly and that domestic and overseas cement layout will be steadily promoted. The 2020 net profit forecast was lowered slightly to $1.97 billion (the original forecast was $2.11 billion), maintaining the company's 2021-2022 net profit forecast of $2,40/2.58 billion. The corresponding EPS was $0.36/0.44/0.47, maintaining the target price of HK$2.20 and the “buy” rating.
1H20 revenue was -9.1% year on year, and net profit of the mother was -5.3% year on year. The pandemic affected cement volume and price performance. The performance was slightly lower than expected, and the dividend frequency changed from once every six months to once a year. The company's 1H20 revenue was 3.01 billion yuan, -9.1% year on year; gross profit was 1.05 billion yuan, -7.4% year on year; net profit of the mother was 750 million yuan, -5.3% year on year.
Demand in the region was affected by the epidemic, which led to a year-on-year decline in cement volume and price, and 1H20's performance was slightly lower than expected.
By product, 1H20 cement/aggregate/commercial concrete revenue was 26.0/0.5/290 million yuan (-10.2%/+36.8%/+47.8%), and gross profit was 9.1/0.2/0.6 billion yuan (-14.2%/-3.1%/+50.2% compared to the same period). The company did not propose a dividend in the medium term (dividend of 0.036 yuan/share in the same period last year). We think this is just a change in the frequency of dividends. It is expected that the 30% dividend ratio will still be maintained throughout 2020.
The volume and price of cement fell sharply in 1H20. The epidemic combined with delays in the commencement of major projects led to poor performance in the core profit area of Shaanxi. 1) Looking at sales volume, 1H20 sold 8.24 million tons/1.35 million tons/590,000 square meters of cement/aggregate/commercial concrete, compared to -2.5%/+22.7%/+78.8%. Cement sales declined in the first half of the year due to the impact of the epidemic; benefiting from the gradual development of production capacity, sales of aggregates and commercial concrete continued to grow. Looking at prices, the price of a ton of 1H20 cement was 315 yuan (-27 yuan/ -7.9% year on year), the price of a ton of aggregate was 39 yuan (+4 yuan/ +11.4% year on year), and the single price of commercial concrete was 486 yuan (-102 yuan/ -17.3% year on year). The price of cement was lowered due to the disturbance of the epidemic. 2) Looking at the subregion, 1H20 Guanzhong/Shaannan/Xinjiang/Guizhou cement sales were 348/321/95/600,000 tons, respectively, +9.8%/-18.9% /+23.4/ +9.1%; the tonne prices in each region were 316/302/395/249 yuan respectively, -4.0%/-11.4%/-12.8%/-8.1% compared with the same period last year. With the exception of southern Shaanxi, sales increased year on year, while sales prices in all regions fell year on year; despite the company's dominant market position in the traditional core profit region of Shaanxi, affected by the epidemic, the gradual completion of projects under construction, and delays in the commencement of major projects, the volume and price of 1H20 Shaanxi fell year on year.
The decline in coal prices led to an improvement in tonnage costs, but the reduction in cost was less than the price drop, and gross profit per ton declined somewhat. Looking at costs, the cost of 1H20 cement tons was 205 yuan (-12 yuan/ -5.5% year on year), of which raw materials/coal/electricity/depreciation/depreciation/labor/other costs were 61.4/50.4/30.5/33.0/13.9/15.6 yuan respectively, compared to -8.4%/-32.2%/-23.2%/-6.7%/-28.0%/-29.8%. As reflected in gross profit, the gross profit of 1H20 cement tons was 110 yuan (-15 yuan/ -12.0% year on year), some year-on-year Decline.
Expense control was good overall, financial expenses achieved net income, and operating cash flow declined year-on-year. The company's 1H20 gross profit margin was 34.8%, an increase of 0.7 pcts over the previous year. The fee rate for the 1H20 period was -1.1 pcts to 6.0% year on year. Among them, the sales/management/finance expense ratio was 0.9%/6.1%/-0.9%, +0/+0.3/-1.4pcts year on year. Overall, cost control was good. The year-on-year decline in financial expenses was mainly due to higher interest on priority notes paid in the same period last year. In terms of cash flow, the net inflow of operating cash was 760 million yuan (-49.3% year-on-year), mainly due to the impact of the decline in sales and profits of the main cement business; the net outflow of investment cash of 1.26 billion yuan (net outflow of 930 million yuan in the same period last year); and the net inflow of fund-raising cash of 800 million yuan (net outflow of 350 million yuan in the same period last year).
After the rain disturbance is over, it is expected that prices will recover relatively quickly and that domestic and overseas cement layout will be steadily promoted. Considering that the rain disturbance in the company's core market and surrounding areas is about to end, demand for related infrastructure is expected to gradually recover, industry self-discipline in the region is expected to strengthen, and we expect the company's cement sales to rise steadily in the second half of the year; prices are expected to usher in a restorative increase in the short term, and there is a possibility of further increases after entering the peak season. In addition, the company is steadily promoting domestic and overseas cement layout:
On August 2, the company announced the acquisition of 97.5% of Kangding Paomashan Cement's shares. The target of the acquisition is one of only two clinker production lines in Ganzi Prefecture, Sichuan. It is expected to benefit from the advancement of major projects such as the Sichuan-Tibet Railway, which will enhance the company's performance in the short to medium term and benefit the western development strategy in the new era in the long term; the company's new production line in Mozambique is also expected to be put into operation within the year, and production costs are highly competitive locally.
Risk factors: major infrastructure projects fall short of expectations; aggregate and commercial concrete production falls short of expectations; rain and weather disturbances, etc.
Investment advice: Considering factors such as the pandemic and rain on demand side disturbances and delays in the commencement of major infrastructure projects, we lowered the company's 2020 net profit forecast to 1.97 billion yuan (the original forecast was 2.11 billion yuan). At the same time, considering that the postponement of major projects only affected the pace of demand and the contribution of the company's new domestic and foreign production capacity to performance, we maintained the company's net profit forecast of 24.0/2.58 billion yuan for 2021-2022. The corresponding EPS is 0.36/0.44/0.47 yuan. The current price for PE is 3.6x/2.9x/ 2.7x; Based on the assumption of a 30% dividend rate in 2020, the current price corresponds to a dividend rate of 8.5%, and we maintain the target price of HK$2.20 (corresponding to 1.0 times PB in 2020) and the “buy” rating.